NOTE: This is an update from Joe McMonigle's flash note Thursday morning “Trump moving forward on Venezuela oil sanctions” as we provide additional context and further details.
U.S. Secretary of State Rex Tillerson ended a recent foreign trip through South America this week with notable comments that the U.S. was exploring energy sanctions on Venezuela in response to an upcoming presidential election in April.
It was not clear at the time if Tillerson’s comments were simply talking points during a visit through the region or a real change in U.S. policy. It now appears that it is indeed a change in U.S. policy as we have learned that President Trump has given the green light to future oil sanctions on Venezuela.
An announcement is likely several weeks away until other details are finalized. Specifically, the scope of sanctions is still being discussed internally whether sanctions will prohibit U.S. imports of Venezuelan crude or wider sanctions on all Venezuelan crude sales globally or other measures.
The Administration last considered oil sanctions in July with Trump and his National Security Council as the main advocates. At the time, Secretary Tillerson and the State Department were opposed to sanctions out of concern about creating a humanitarian crisis. Hurricanes that impacted Gulf Coast refiners at the end of August pushed the decision on Venezuela oil sanctions to the sidelines.
Tillerson is now the main advocate for oil sanctions and recommended this action to Trump this week. Tillerson's trip to the region was largely to consult allies about the impending U.S. action.
Despite new reports that said Tillerson’s initiative got a cool response during his meetings on the trip, we are told he received support for U.S. action with the major concern for countries in the region that rely on Venezuelan crude imports. On Wednesday, Tillerson alluded to a task force with Canada and Mexico to address regional concerns about oil sanctions and to develop potential aid packages. In addition, Brazil and Colombia announced new border security measures on Thursday as the Venezuela crisis seems to be moving into a new stage.
Many U.S. policymakers believed that the Maduro regime would collapse on its own under the weight of severe economic and political conditions by the end of 2017. But Maduro has held on.
Tillerson and others policymakers now believe that current conditions are untenable for the Venezuelan people and sanctions are needed to expedite the end of the Maduro government. The April presidential election in Venezuela is now the catalyst for U.S. sanctions.
Venezuela exported about 500,000 barrels a day to the U.S. Gulf refiners in January but down from about 800,000 from a year ago. Sales of Venezuelan crude to U.S. refiners provide the cash lifeline for the Maduro regime. U.S. sanctions will likely impact those U.S. gulf refiners that will have trouble securing replacement of similar heavy crude. In addition, it’s unlikely that Venezuela will find a replacement buyer of its crude exports to the U.S., and the physical disruption of this crude from the market will provide a boost to oil prices.
The Administration is concerned about the impact on gulf refiners but also believes it has some running room with declining oil imports from Venezuela and rising U.S. production.
While Trump has signed off on oil sanctions, many details and other related decisions regarding the scope of sanctions are still under discussion. In addition, as we have seen on other issues, Trump can also change his mind until a formal announcement is made. We will provide furthers updates as developments warrant.
